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Wall Street Has a Problem as High Frequency Trading Moves to Washington

Posted by Larry Doyle on July 27, 2009 11:25 AM |

When a hot financial topic hits Main Street and there are political points to be scored or lost in the process, little wonder it quickly moves on to Washington. I speak of the increasing attention and focus on high frequency program trading.

The serious ethical, if not legal, concerns surrounding high frequency trading hit Main Street this past Friday with a lead article in the New York Times. I highlighted that article along with my extensive writings on this topic here at Sense on Cents in my piece “Wall Street Has a Problem as High Frequency Trading Moves to Main Street.”

Well, we awaken this morning to see the high frequency trading issue making waves in Washington. The Wall Street Journal reports In a Flash, Schumer Warns SEC:

Sen. Charles Schumer (D., N.Y.) told the Securities and Exchange Commission that he will move to limit “flash” orders for stocks if the agency takes no action against them.

The practice routes stock trades through private liquidity pools before being sent onto other exchanges for filling. Critics contend that flash ordering creates a two-tiered system of investors, where those with access get a better price than those without.

“If the SEC fails to curb this practice, I plan to introduce legislation in the U.S. Senate to prohibit the use of flash orders in connection with optional pre-routing programs in order to ensure that trading in U.S. public capital markets is fair and transparent for all market participants,” Sen. Schumer wrote Friday.

While on one hand I commend Schumer for being proactive on this front, I am reminded that he has been one of the largest beneficiaries of campaign contributions and lobbying dollars from the banks and hedge funds engaged in high frequency program trading. Without questioning Schumer’s motivations, is he taking action to curry public favor against his being linked so closely with Wall Street?

Additionally, the fact that Schumer or any other political representative needs to address this issue again brings into question the efficacy of the regulatory bodies charged with protecting investor interests. How can any observer of high frequency program trading believe the investor playing field is anywhere close to being level?

Why has the field sloped? Very simply, as the various stock exchanges compete for business, the officials running the exchanges have traded investor protection and interests for the volume and revenues provided by high frequency program trading.

Who should have been engaged with these exchanges to prevent these abusive trading programs? The SEC and FINRA. Who actually exposed the issues surrounding high frequency program trading? Financial blogs and Joe Saluzzi of Themis Trading. I commend Mr. Saluzzi given his position in the marketplace.

I am excited to apprise our readers and listeners that I will have Mr. Saluzzi as my guest this Sunday evening August 2nd from 8-9pm on my internet radio show, NoQuarter Radio’s Sense on Cents with Larry Doyle.

Perhaps our elected representatives in Washington along with financial regulators at the SEC and FINRA may care to listen and learn.


Related Commentary

Is Uncle Sam Manipulating the Markets?; July 1, 2009

Is Uncle Sam Manipulating the Markets? Part II; July 6, 2009

Is Uncle Sam Manipulating the Markets? Part III;  July 8, 2009

Why High Frequency Program Trading Smells; July 14, 2009

High Frequency Trading: Point-Counterpoint; July 17, 2009

High Frequency Trading Debate: Mano a Mano; July 24, 2009

  • Trader

    Now, hopefully they will see dark pools in the same light. Dark pools move liquidity away from the central marketplace and hide liquidity and price discovery. All orders must be seen in a central marketplace at the same moment to all participants….no exceptions

  • Aaron kramer

    Schumer is shaking down Wall St. Here is how it works in a clear step by step process that is sure to bring in big donations to Schumer’s coffers.

    Step 1. He proposes a regulation.
    Step 2. Makes an announcement in the press
    Step 3. Waits for Wall St. to call and ask for favorable terms or loopholes.
    Step 4. Tells Wall St. he always has there interest at heart and he has made that clear throughout the years.
    Step 5. Tells them the public needs action and clearly indicates it could impact future elections is the public is not placated.
    Step 6. Wall St. Responds that they have always loved him and that a check is in the mail so he can continue to represent the needs of Wall St. effectively. Step 7. Go back to the media, will legislation in hand, and tell them you have new regulations that will force Wall St. to “blah blah blah”
    Step 8. Hold a hearing on Capitol Hill and praise Wall St. for working with him while castigating them for making him work.
    Step 9. Either step out of the limelight and wait six – twelve months and begin the process anew or go on Meet the Press to ensure everyone knows your actively engaged.

    Wall St. is happy and the Johnny Q. Public thinks something is actually happening.

  • Larry Doyle

    Aaron….you make me laugh and that is good. Your comment reminds me of a post I wrote, Who Protects Investors from Regulators?

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